Building the blues

Before he retires in four years, Raymond McCaskey wants to make Health Care Service one of the country's most powerful forces in health care. Photo: Andreas Larsson

Raymond McCaskey presides over the largest health insurer in Illinois. It's not enough.

The CEO of Health Care Service Corp., corporate parent of Blue Cross and Blue Shield of Illinois, wants to spend his four years before retirement merging other Blue Cross plans around the country. If he pulls it off, Chicago-based Health Care Service could be one of the most powerful forces in American health care.

"We want to continue to grow," Mr. McCaskey, 61, says. "The entire industry has been consolidating."

Mr. McCaskey is consolidating with them. Health Care Service, which already operates Blues plans in Illinois, New Mexico and Texas, will close on its acquisition of Blue Cross of Oklahoma later this year.

Adding Oklahoma will give Mr. McCaskey another 500,000 insured, bringing Health Care Service's total to 10.4 million. The additional revenue and cost savings should boost net income, which was $994.7 million last year.

SIZE AND MUSCLE

But he isn't stopping there. Any of the three dozen non-profit Blues plans across the country could be folded into his company.

The more insured he racks up, the more money Mr. McCaskey saves by consolidating administrative and operating functions. More importantly, it gives the company size and muscle to negotiate lower payments to doctors and hospitals.

That's good for Blue Cross customers  it can pass on savings as lower premiums  but intimidating to the company's providers.

"They can say, 'We bring a heck of a lot of people into your office. If you don't want to play ball, we'll take you out of our network,' " says Bradley Ellis, an analyst with Fitch Ratings, which gives Health Care Service's bonds an A rating, his highest among health insurers.

The Blues' pricing power also gives competitors fits. In the Chicago area, where Blue Cross is by far the largest insurer, it has taken large accounts from insurers that can't match its low premiums.

STEALING CLIENTS

Humana Inc., the third-largest health insurer locally, has lost business because it wouldn't lower its premiums. After serving the Chicago Public Schools for more than a decade, Humana walked away.

"If I can't get a proper price on a large piece of business, I'm not going to lose money on it," says Julius Alberico, CEO of Humana Illinois.

When Mr. McCaskey takes over other states' Blues, he goes after the big accounts. Within the first few years of taking over Blue Cross of Texas in 1998, Mr. McCaskey stole clients such as Texas Instruments Inc., HEB Grocery Co., the University of Texas and Texas A&M University from the state's then-dominant insurers, Aetna Inc. and Cigna Corp.

Growth by fits and spurts

Health Care Service, parent company of the Illinois Blues, has swallowed up several other Blues plans.1994

Health Care Service calls off merger with Blues plans in Iowa and South Dakota, which would have resulted in big bump in enrollment.1998

Merges with Blue Cross and Blue Shield of Texas, adding almost 2 million insured.July 2001

Acquires Blue Cross and Blue Shield of New Mexico.August 2001

Calls off a deal to affiliate with Regence Group, which includes Blues in Idaho, Oregon, Utah and Washington. Illinois executives wanted deal to result in full-fledged merger.December 2004

Announces merger with Blue Cross and Blue Shield of Oklahoma; expected to close in 2005. Would add 500,000 enrollees, solidifying Blue Cross as fourth-largest health insurer in U.S.

POSSIBLE REVIVAL

The Oklahoma acquisition, Mr. McCaskey hopes, will help win accounts like American Airlines Inc., based in Texas, with operations in Oklahoma and a hub in Chicago.

Even in states where it doesn't have a presence, Health Care Service has reciprocity agreements with independent Blues plans. But Mr. McCaskey prefers ownership.

He's eyeing possible revival of a deal that fell apart four years ago to acquire a group of Blues plans in Idaho, Oregon, Utah and Washington. In 2001, those plans, known as the Regence Group, agreed to form a partnership with Health Care Service.

The pact was supposed to lead to a full-blown merger, but the deal fell apart because of regulatory issues and Regence's failure to properly consolidate its four plans, a key to saving money. Mr. McCaskey still believes it would make a "dynamite combination."

POLITICAL OBSTACLES

Besides revisiting the Regence plans, Mr. McCaskey may make a run at any number of other states; likely candidates would be in the Midwest or Southwest, says Fitch Ratings' Mr. Ellis. The Blues plan in Kansas tried to sell itself to Wellpoint, then known as Anthem Inc., but was blocked by that state's insurance regulator in 2002.

The state opposed the idea of Kansas Blues becoming a for-profit insurer, but that wouldn't be the case with Health Care Service, Mr. Ellis says. Such political obstacles are common in deals involving non-profit Blue Cross plans.

There's always the chance that smaller plans, facing brutal competition, will approach Mr. McCaskey about a deal, as well.

Those with such inklings will have ample opportunities to bend his ear: Blues executives from around the country meet four times a year in Chicago, home to the headquarters of the national association of Blues plans.